The European Central Bank (ECB) stopped all payments by one of Latvia's largest lenders on Monday, after its liquidity position collapsed in the wake of allegations from U.S. authorities.
The ECB requested Latvia's banking supervisor impose a moratorium on ABLV bank, the small Baltic nation's third-largest lender, in order to freeze all payments by the bank on its liabilities.
"In recent days, there has been a sharp deterioration of the bank's financial position," the ECB said in a statement Monday.
"A moratorium was considered necessary given that the bank is working with the Latvian central bank and authorities to address the current situation."
What happened?
Last week, the U.S. Treasury accused ABLV bank of "institutionalized money laundering," including allowing its clients to conduct business with parties connected to North Korea. This would be in violation of sanctions imposed by the United Nations (UN) following Pyongyang's nuclear weapons program.
In response, ABLV said the accusations were based on unfounded and misleading information. ABLV is based in Riga but also has an office in Luxembourg as well as a subsidiary in the U.S.
Why is this a crisis?
The moratorium imposed by the ECB — which supervises ABLV from Frankfurt, Germany — comes at a difficult time for Latvia's banking sector as the head of the country's central bank was detained by Riga's anti-corruption agency over the weekend.
The home and offices of Ilmars Rimsevics, who also sits on the ECB's rate-setting committee, were raided by officers from Latvia's Corruption Prevention Bureau on Saturday. However, no details about the investigation or the nature of the raids have been made public. Latvian media has suggested the questioning of Rimsevics was not connected to ABLV.
The detention of Rimsevics prompted Latvia's Prime Minister Maris Kucinskis to call an emergency cabinet meeting Monday. Shortly afterward, he told Latvian television that the head of the country's central bank should resign.
'Zero tolerance'
Latvia's central bank declined to comment on the investigation regarding Rimsevics, but said it had a "zero tolerance policy in respect of corruption and other illicit activities."
It also said its own activities would continue in the "usual routine" from Monday.
A number of banks in Latvia have been subject to investigations regarding improper business practices in recent months. Last year, two lenders were fined for allowing clients to bypass international sanctions preventing payments to North Korea.